Innovation and our Aussie Tech Sector is under Attack

It seems as if Innovation and companies willing to take risks and innovate and export their Innovations are under attack by our Government!

When the Libs came to power – the goal of Australia being an innovation nation and “smart exporter” of technology, software and services was squarely on the agenda.

Innovation was encouraged by the Innovation Ministers for Companies to Innovate, to take risks and “give it a go” and the Government would support this!

The Government was talking up a national Innovation agenda and ideas boom!

As a result, the industry started to boom , venture capital started to flow , there was a buzz and we were gaining momentum up the innovation curve and start punching above our weight.

I am not sure what happened , but after the 2016 Election, Innovation took a back seat – as there was obviously more important issues to deal with!

Was it because many in the Coalition perceived that voters were worried about the impact on jobs from new technology, and dialled back support for the sector?

If so , I believe that is very short sighted and should rather focus on upskilling and re-educating workers to embrace the inevitable growth of machine learning and artificial intelligence, and use these technologies as a tool to help us grow as a nation !

The R&D tax incentive programme is arguably one of the most important and successful programmes for emerging technology start-up and innovative companies in Australia, and there is quantifiable evidence that Australian Industry has had the benefit of more than a 10X return to the Country.

The programme has been under attack and at risk of becoming totally ineffective as a tool to help innovative companies grow.

The R& D tax Incentive Programme

The new definition and the way it is being being applied by Ausindustry is totally inappropriate and not in sync with what R&D and innovation is happenning in the marketplace, and what actually is R&D and innovation.

Theoretically every software and innovative company doing real R&D could potentially come under attack for being ineligible, making every innovative software company claiming the R&D tax concession at risk of having to reimburse the incentive claimed.

Case in point

Airtasker and Digiviser are Australian software and tech success story – have been hit by shock demands to pay back millions of dollars in Research and Development incentives, because of draconian qualification measures and definitions of what constitutes R&D.

Many Companies have been using their accountants to lodge their R&D tax incentive claims without being aware of the potential risks that their claims are not eligible.

There was an alert from the ATO back in February 2017 which manages the scheme that said they were concerned that companies were claim for work, which didn’t count as “pure R&D.”

However, crucially, AusIndustry has been cracking down on previously awarded incentives, applying a rigid ATO definition Where

“companies must prove that they were working on experiments for the purpose of “generating new knowledge”. These must be seeking to determine results that could not have been already worked out, and be conducted in certain prescribed ways.”

“Ask any software developer whether a technology will work and they will say that with platforms that are available now – any software can be developed with relative certainty and a plan!”

Ausindustry base the definition around a framework known as the Frascati Manual to audit the self-assessed applications.

The Frascati Manual classifies research into three categories:[1]

Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge about observable phenomena and facts, not directed toward any particular use.

Applied research is original investigation to acquire new knowledge directed primarily towards a specific practical aim or objective.

Experimental development is systematic effort, based on existing knowledge from research or practical experience, directed toward creating novel or improved materials, products, devices, processes, systems, or services.

The Airtasker fiasco

Airtasker co-founder and chief executive Tim Fung told the AFR that his company’s two most recent R&D rebates have been completely rejected under audit, and he faced paying back millions of dollars, plus a potential 75 per cent penalty for making erroneous claims.

At the time of applying for the rebates he had engaged a tier-one professional services firm at a cost of tens of thousands of dollars to ensure the claims were watertight, and he said Airtasker would have been unable to grow as it since has, without securing the funds.

During the audit, Airtasker had to devote a huge amount of time and resources to walking AusIndustry through the details of its work, including thousands of pages of documentation and many days for its chief engineer and financial controller explaining the importance of the relevant research.

Airtasker’s failed R&D claims involved working out how to combine two previously separate software languages, which it had demonstrated via web searches had not been done elsewhere before. It also developed machine learning and artificial intelligence algorithms to apply to online content moderation and detect undesirable behaviour on its platforms.

However, he said, the Frascati model required documentation that was more akin to scientific laboratory experiments, rather than agile software development methods, which are common across the tech sector.

Its claims were disallowed saying it didn’t meet the requirements.

Airtasker has the luxury of paying back the rebates and not needing to rely on future incentives as its rapid growth has resulted in a $33 million funding round from Venture Capital.

This success story would not have been able to have been achieved without the massive spend on a research and Development and the support of the R and D tax Incentive scheme during it’s time of need – having grown from 15 (when it claimed its first R&D incentive to 200 employees now with 110 on Australia!

James Spenceley Chairman of Airtasker snd owner of the Illawarra Hawks National Basketball League team. He is both a seasoned entrepreneur, having founded telecommunications company Vocus, and an increasingly prolific investor in Australian start-ups through MHOR Asset Management business.

James has this to say

“I have noted a change in the approach from the government towards supporting technology start-ups, and is worried because he believes the R&D incentive scheme has been central to the developing strength of the local tech scene.

Out of the blue, the government just came back and said we’re not accepting any of your previous claims going back two years … I’ve done 10 years of R&D claims, but I’ve never seen sort of black and white behaviour like this,”.

The Digivizer Fiasco

Digivizer Emma Lo Russo said her company also faces repaying more than $1 million in rebates after AusIndustry deemed its research “does not constitute new knowledge”.

Ms Lo Russo, who spent $80,000 on professional advice to help ensure Digivizer’s claims complied with the R&D rules, said the finding was both baffling and “very, very frustrating”.

The creation of Digivizer’s analytics software for businesses and content creators, was a direct result of her team’s research and development efforts.

The R&D rebate allowed them to create something new, innovative and different said Miss Lo Russo who was proud to be a poster Australian technology brand that others in the industry can aspire to

So is Software Development “R&D and part of the Innovation Ecosystem” as Defined by the Government ?

If not we are in danger of Killing a Young and Vibrant Tech Industry

“It will definitely change that position for us as to whether we make a decision to stay in Australia, or move elsewhere” says Airtasker CEO Fung

“We hire software engineers in Australia and are creating jobs in that regard, but certainly if the incentives exist elsewhere to do that more economically, we have to think about that.”

What the industry expert has to say

Daniel Petre, cofounder of Airtree Ventures and board member of Innovation and Science Australia, an independent statutory board set up in the Department of Industry, Innovation and Science to advise government on innovation, research and science matters

said that the government needs to address this issue QuickSmart

“the fact that this key programme for supporting start-ups was not suited for software companies is ludicrous”

“Whether we like it or not, the future is a world where everything is underpinned by software and one where all the growth in employment will come from tech-focused firms, many of them scaled start-ups,”

“Job growth is not coming from the banks adding more people, big end mining adding more jobs, retail adding lots more jobs. It is all about tech, healthcare and maybe education.”

“The government pulled $2.4 billion out of R&D last year and now you are seeing software companies getting audited and told to pay all the money back … “

“They don’t have the cash and will go out of business, it is a clusterfuck!! “

“Everyone in the start-up industry, which is creating thousands of jobs, has no idea how to engage in a sane conversation with government and so has no idea what to do.”

A New definition of R&D – relevant to tech start-ups is urgently required.

“R&D incentives were the difference between small software companies having the chance to grow or die . “

“rorting of the system was more likely at large institutions with armies of accountants than at emerging start-ups.”

He said access to the funding meant start-ups could grow bigger before seeking external VC funding, which in turn meant founders were less diluted, made more money when they exited and would then pour more money back into the local ecosystem in future.

“Software is developed in agile teams, which try things and discard things, it doesn’t map well to the structure that the Frascati model tries to create,” Mr Petre said.

“They really need a new definition for what counts as R&D in software, but we are all going to be dead by the time the government decides on one.”

What the Minister has to say

When confronted with concerns about the sector, Minister for Industry Science and Technology Karen Andrews said the government was

“listening to the needs of start-ups, and recognised the importance of these businesses to the economy.”

“Being a self-assessment program, companies are responsible for their own claims and need to ensure the advice they receive is of a high quality”

“We are basing the definition on the same basis as that if Britain and Canada”

What the Opposition has to say

Shadow Minister for the Digital Economy Ed Husic said he had raised concerns with previous Minister Kelly O’Dwyer about concerns that software companies would simply stop applying for R&D incentives, out of fear of failing future audits.

“While it’s crucial that all firms use the incentive according to the rules, we’ve been concerned for a while that a sledgehammer is being used to crack a walnut,” he said.

“We’ve got to get the balance right and we’ll be seeking a briefing from the Minister about this particular matter.”

It will be interesting to hear what Marcus, Mick and the team at BSI Innovation have to say during their 2018/19 update in Brisbane on Friday! They are the leading experts in this field and have been involved with this programme for the past 25 years!

If you want to have a chat with them, hit me up and I will refer you to them!